Opinion

11:52 am

Mon May 14, 2012

Op-Ed: Euro Crisis 'Uniquely Greek'

And now, the Opinion Page. Markets around the world continue to fall. After losing ground several days in a row, the Dow Jones Industrial Average down 80 points at last glance as the political stalemate drags on in Greece. A final push is set to begin tomorrow in Athens to form a coalition government after elections that served as an angry rebuke of austerity by Greek voters. Analysts are increasingly concerned that Greece's political paralysis may lead that country to leave the eurozone and head towards default.

If that happens, there's concerned that dominos may eventually include Spain, Portugal, Ireland and even Italy. In an op-ed in The Huffington Post, London Business School professor Michael Jacobides called it a uniquely Greek tragedy. He joins us in a moment. What do you want to understand about the crisis in Greece and the EU? Give us a call, 800-989-8255. Email us: talk@npr.org. Michael Jacobides joins us now from an office in London. Nice to have you on the program with us today.

MICHAEL JACOBIDES: Thank you very much. Nice to be with you.

CONAN: At this point, you see any resolution to the political crisis in Athens that might avert a catastrophe?

JACOBIDES: Well, there is a last-ditch effort that's going on right now under the aegis of the president of the republic. So apparently, they will have one last meeting tomorrow at 2 P.M. local time, Greece, to try to see whether they can create a national unity government. But the problem is that the parties appear to be very fractious, and all is very tentative and very unclear.

CONAN: The center-left and the center-right parties that had swapped power in Greece since the departure of the colonels, what, 40 years ago. They were roundly rebuked, came in first and third respectively with a hard-left coalition in the middle that is dead set against sticking to the kinds of austerity programs that the main parties had agreed to.

JACOBIDES: Absolutely. I mean, the challenge here is not that their debts have (unintelligible). The challenge is that what they are actually proposing is simply not overly consistent because, on the one hand, they are saying that they will rebuke that, and they said that they will literally throw out the representatives of the troika, i.e., the EU and the IMF and the ECB, but at the same time, they do not clearly say that they will go out of the euro. So there is a very hard opposition to these cuts.

But on the other hand, there's no clear alternative about what will happen. And I think that the challenge here is that the course that they're suggesting is simply not something that is feasible in terms of the parties that might need to support Greece, if that's to be the case.

CONAN: So if these last-ditch efforts fail and again there's a meeting tomorrow, but if they fail, that would force the president to call a new election, which would take a month which would put this very close to the deadline for new rounds of cuts, which don't look to be in the cards.

JACOBIDES: Absolutely right. So the problem is that if the new elections need to happen, they'll happen either the 10th or the 17th, probably 17th of June, which is perilously close to the deadline the Greeks have for a new round of measures. The challenge that we've got here is that there's a plan B - or right now, it might be plan C or plan D - has not been thought through, certainly not from the Greek side and certainly not from those that oppose that. And the challenge is that I think that even in terms of the policymakers, you know, globally, we do not have a clear contingency in terms of what might happen.

The problem of letting Greece go sounds much simpler than what it is in practice, and we may have a very, very nasty turn of events. A somewhat more organized and measured exit of Greece from the euro may be one possibility. But at this time, it seems that if we do have a stalemate, there's not going to be any backup, and this could lead to a generalized panic and chaos, not just in terms of the medium term where the cost has been estimated anywhere from 100 to 400 billion euros. But in particular, in terms of the short term operation of the economy, I should note that the problem is not just debt. The problem is that Greece has a current account deficit(ph). It means that it import is more than it exports, which means that things will be rationed. And with a panic, of course, you're going to have any tourists, which means you're not going to have any currency. And we didn't quite know how operating with a new currency can possibly work. So it can be a very fine mess.

CONAN: And you talked about a stampede. Analysts are concern that if Greece leaves the euro at that moment, anybody who's got money in a bank account in Rome or in Madrid or in Dublin or in Lisbon is going to move that money as quickly as possible to either Berlin or to New York.

JACOBIDES: That is one of the big challenge, i.e. the fact that right now you've got the currency issues and the financial issues that are comingled. The problem is that if you feel that your country may be at risk (unintelligible) you know that your currency is devaluating(ph) and obviously you want to have your money safe, and that destabilizes the national services sector, the financial system, its very ability to operate and function, which in turn puts substantial pressure on the currency itself. I would hope that the powers that be would realize that the potential risk in terms of doing that may be too big. And I think that if - even if we go to a very difficult scenario, it might be better to try to find a formula of letting Greece have some kind of reneging of its payment with all the problems that that might have for the operation of a central government. Then (unintelligible) linking that to the exit from the euro.

CONAN: But which Greek government would you give that benefit to?

JACOBIDES: Well, the challenge right now is that we don't quite know what will happen after the next elections. So I think that most people realize that life in a few months is going to look horrendously difficult if you exit the euro simply because we have never had any case of a peaceful departure from a currency of that sort. Usually when you change currencies, it's a very long and complicated arrangement. If you think about all the other examples that people are using, you think of Argentina and so on and so forth, there you have PIGS(ph) , i.e. you have the possibility of deciding that you will stop a particular monetary policy. You also have the possibility of having capital controls.

Greece has neither. Greece has signed on to free movement of capital as part of the European Union. So what will happen? Will Greece need to leave and essentially abandon its mutual commitments to the European Union? What will happen to Greek companies? Will they have their international syndicated loans that may be made in euros - still in euro - and their own local deposits in Greece? Will the banks in Greece demand their loans in whatever new currency may have? It will be a real nightmare and we won't have any way of having the economy work in a sensible fashion.

So I think that some of the analysts who are considering whether outside or inside the euro might make sense, probably have not focused to the extend that they should to the huge disruption and the unforeseen consequences that the process of the exit may have. And this may have huge trickle effects to the global economy - much, much more than what the GDP might warrant by itself.

CONAN: And Greek GDP just two percent of the European - the zone GDP overall. Michael Jacobides, Sir Donald Gordon Chair of Entrepreneurship and Innovation at the London Business School, with us from his office in London. Let's see if we can go to the phones, and Ev(ph) is on the line calling from Denver.

EV: Hi. Thanks for taking my call.

CONAN: Sure.

EV: I understand it's really bleak in Greece with their austerity, but kind of - I'm wondering if they need to begin with their infrastructure and having the population pay their taxes, things that kind of - you know, I don't think they'd be this bad a shape if they had that kind of - had an authority to bust those people they their taxes. Apparently (unintelligible) I've heard. I may be wrong. A lot of people just don't pay their taxes.

CONAN: Ev, your phone is betraying you. Let me relay that back...

JACOBIDES: That's fine. I heard that.

CONAN: OK.

JACOBIDES: I will respond to that. Let me - let's actually, first, take a look at the data and see what has happened in terms of Greece. The GDP of Greece has gone down or will have gone down by the end of this year nearly 25 percent. This is only paralleled with Russia's decline, '91, '93. Not even in wartime do you see economies shrink to that extend. So I think that it is hard to overestimate the amount of suffering that people are actually having. And obviously contractions such as these are not visited equally on social classes. There are many people who used to have an entirely sensible and normal life that right now are simply not able to make ends meet.

And the result of the voting that you saw was desperation. The extreme left, there were questions in the polling exits after that of - did you vote for the particular party or against the political system? I think that over three quarters of the vote for SYRIZA, the radical leftists who are now the second party who are blocking the formation of the government, are not working for that party but against the system. They understand that the reasons that your caller actually pointed out were at the root of the problem, and they are protesting against that. So the answer is, would we want to do that? Absolutely.

The problem is that the public administration in Greece is utterly ineffective. There has been a study recently of the OECD that provides a very bleak picture, and this is where the tragedy is. Greece, as a country overall, has got less debt than the United States - i.e., if you add the individual debt, the corporate debt and the sovereign debt, it still is substantially less than the United States and less than the United Kingdom. It's not in the aggregate over - an over-extended credit. The problem, though, is that it is the government that has taken too many loans. And what's even worse, it is the government that is extremely inefficiently structured. It is not able to collect taxes. We have some of the lowest tax collection in the European Union, particularly because it is both badly run and also because it is corrupt, and also we have bad public services.

The problem is that the European Union as well as, certainly, Greek politicians that should bear the lion's blame of the share have not focused on how they will solve these issues. I mean, it's funny...

CONAN: But solution - solution, forgive me. Solution of those issues is going to take years if not decades. This is a cultural matter.

JACOBIDES: No.

CONAN: You've got weeks, if not months...

JACOBIDES: I beg to differ. I beg to differ. I think that you already see the very real possibilities of getting the data that exists in terms of what data is available in terms of the tax offices and simply pursuing that - i.e. the low-hanging fruit, the possibility of doing the basic cross-checking, which is now the case, should be able to yield fruit if the effort was on some of the structural reforms. And I think that what has happened is that between 2009 and 2011, the European Union and in private conversations, both the people from the IMF and to some extend the people from the European Union and the taskforce would admit that not enough pressure has been put on the structural measures. And what has happened is that they have simply allowed the Greek government to tax more.

I think that the realization of the problem has actually emerged. So the possibility of both increasing that and rationalizing the spend(ph), doing a massive cost-cutting, does exists. If you think about corporate turnarounds, they don't necessarily need a decade to change. The low-hanging fruit can be had within a few months.

The focus in Greece has not been a focus on execution. It has been a focus only on the symptoms, not on the causes. And I think that the European Union, in particular the European Commission, bears some responsibility for that. The people that have been sent to help Greece are mid-level bureaucrats from Europe and have got neither the mandate nor the stomach nor the skills to impart the large-scale change management that's actually needed.

CONAN: You can find a link to Michael Jacobides' op-ed that appeared in the Huffington Post, "A Uniquely Greek Tragedy," at npr.org. Click on TALK OF THE NATION. You're listening to TALK OF THE NATION from NPR News. Steve is on the line, calling us from Forth Smith, Arkansas.

STEVE: Thank you. In a crisis this bad, how much does democracy itself limit a government from imposing and realizing, you know, a stabilizing austerity? Is it the democracy, is it the voters that just won't put up with it? Or is it just the ineptness and corruptness of the power of the government?

JACOBIDES: It's actually a rather tragic irony that we are speaking about that and the country where democracy was developed. But all of these issues, these endemic problems in democracy were actually, sadly, also visible when it was developed. So we are seeing a return of problems that we know emerge. The challenge over here is that people are confused, they are baffled, and they are also vastly misinformed. The reason for that is that the media - and let me just add, you get another(ph) important component to that - the media have been part and parcel of the problem.

The challenge is that Greece has had a bloated media sector that grew hand-in-hand with a political system supporting people that were later involved in the political process and on the other hand benefitting from state largess in terms of advertising and other ways of finding revenues in the press. That means that you do not have the same amount of both ability to expose part of the underlying problems and you also have non-trivial amount of the media outlets that are playing along with the most dangerously extreme demagogues trying to tell people that it's all a problem of the bankers, it's all the problem of the Germans that want to suck Greek blood, or you know, equally horrific pictures of that sort. Greek newspapers, you know, providing pictures under not so indirect allusions of Second World War paraphernalia of both Schauble, the minister of finance in Germany and the German chancellor, Merkel. So there is a problem with information. That's part one.

The second thing is that people are voting out of desperation. And the challenge is that they would like to change it. (Unintelligible) 70 to 80 percent of the Greeks want to stay within the euro. They don't have the possibility of supporting that, and they are casting a vote that is the composite of their discomfort. Sadly, the composite of their discomfort is not what is able to offer a clear alternative.

If you are at the edge of poverty, and you hear politicians saying that we can challenge these Europeans and we can go against austerity and return back to our lives, you obviously want to support them. You may find out that that was nowhere close to possible, that it may be too late.

CONAN: Michael Jacobides, thank you very much for your time today. He joined us from his office in London, where he's chair of entrepreneurship and innovation and associate professor of strategy and entrepreneurship at the London Business School. Tomorrow, historian Bernard Lewis on his latest, "Notes on a Century." Join us for that. I'm Neal Conan. It's the TALK OF THE NATION from NPR News. Transcript provided by NPR, Copyright National Public Radio.